You have been asked by the partners of your firm to prepare a draft memorandum on materiality which will provide guidance to members of staff in conducting the audit of the accounts of limited companies.Required: Define materiality

The auditor should consider materiality when conducting his audit. Materiality is defined as follows. ―Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements‖. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.
Thus materiality provides a threshold or cut off point rather than being a primary qualitative characteristic which information must have if it is to be useful. The concept of materiality is key to the auditor when he is concluding whether financial statements show a true and fair view. The auditor can only report that the financial statements do not show a true and fair view on issues that are material. In designing the audit plan, the auditor establishes an acceptable materiality level so as to detect quantitatively material misstatements. However, both the amount (quantity) and nature (quality) of misstatements need to be considered. Examples of qualitative misstatements would be inadequate or improper description of an accounting policy when it is likely that a user of the financial statements would be misled by the description and failure to disclose the breach of regulatory requirements when it is likely that the consequent imposition of regulatory restrictions will significantly impair operating capability.
The auditor should consider materiality at both the overall financial statements level and in relation to individual account balances, classes of transactions and disclosures

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